Canada Plays its China Card

Resource-rich Canada and resource-hungry China seem in some ways like natural partners. After a slow start, they just might be.

By Hugh L. Stephens for The Diplomat

January 20, 2012

Canadian Prime Minister Stephen Harper has announced that he will visit China next month, in a further sign that despite a slow start, his government is increasingly interested in the Middle Kingdom.

The visit will be his second since he took office in 2006, the first coming in December 2009 when he was chided by Premier Wen Jiabao for waiting so long to visit. Harper’s minority Conservative government had been slow to warm to China, putting concerns over human rights before trade and economic development. But all that is changing, driven in large part by China’s insatiable thirst for access to resources – and some hiccups in Canada’s economic relations with the United States.

Over the past several years, Chinese resource companies have moved aggressively to take stakes in Canada’s oil sands play; in 2010 Sinopec purchased a 9 percent stake in Syncrude Canada, the biggest oil sands project, for $4.65 billion, while rival CNOOC recently closed a $2.1 billion deal to acquire heavy oil producer Opti Canada Ltd. It has also recently been revealed that Sinopec is amongst a group of investors providing early-stage funding for the $5.5 billion Northern Gateway pipeline which, if ever built, will take Alberta oil sands bitumen across northern British Columbia to the west coast for shipment to Asia.

China’s appetite for resources isn’t unique to Canada, of course, but an interesting series of events in the United States has strengthened China’s hand, and led Harper to look more favorably on China and Chinese investments in the resource area. Back in 2004, under the previous Liberal government, MinMetals made an aborted bid for the Canadian mining giant, Noranda. The deal wasn’t completed reportedly owing to other business dealings that Noranda undertook. But the threatened takeover aroused much controversy and soul-searching in Canada regarding the wisdom of letting a state-owned Chinese corporation take such a large role in a Canadian resources sector. China got the distinct impression that its interest wasn’t welcome.

Yet those considerations seem secondary now that the Obama administration has announced that it will reject the application by Trans-Canada Pipeline to extend the Keystone XL from Alberta through sensitive ecological areas in Nebraska to Texas (although it has said the company can reapply, and Trans-Canada has confirmed that it will do so using a new route). The completion of this pipeline would help lock in the U.S. market for Alberta heavy oil, but opposition from environmentalists in the United States has forced the Obama administration to take the decision to disallow the application.

Obama would have preferred to delay any decision until after this year’s presidential election, hoping to offend neither environmentalists nor those who support gaining greater access to Canadian oil as a way of weaning the U.S. off reliance on other less reliable foreign suppliers. However, it was forced to issue a ruling given a February deadline imposed by Republicans through a rider on an unrelated piece of legislation.

The original Obama decision to delay the Keystone review, delivered at the APEC meeting in Honolulu at the same time as Canada was clamoring to be allowed to join the Trans-Pacific Partnership (TPP) trade negotiations, led Harper to announce publicly that Canada needed to seek out other markets if the Americans don’t want Canadian oil, and the decision on January 18 to reject the application further strengthened his determination to diversify Canada's markets. Thus, China’s ambitions nicely dovetail with Canada’s need to introduce a third party into its dealings with the Obama administration.

All this comes at a time when the Harper government is finally rediscovering Canada’s Asia-Pacific dimension. The decision to publicly throw Canada’s hat into the TPP ring is one concrete demonstration of this belated initiative. The rebuilding of Canada-China ties is another. Canada used to enjoy “privileged” relations with China going back to the 1970s, but that legacy was squandered. Still, bilateral trade is relatively strong and growing (although China enjoys a 3:1 trade surplus with Canada). In addition, an investment agreement with China is being finalized, ostensibly to promote Canadian investment in China, although the real effect will be to accelerate Chinese investment in Canada’s oil, gas and mining sectors.

Harper’s visit to Beijing will be one of the last to be hosted by the “old guard” given impending leadership changes this year, but clearly his “China card” needed to be played quickly, so a February visit has now been confirmed. Doing the next round of their minuet clearly suits both parties right now. Let the dance begin.

Hugh L. Stephens is a former senior official in the Canadian Department of Foreign Affairs and International Trade. He is currently Principal of Trans-Pacific Connections/TPC Consulting, based in Vancouver, BC, Canada (www.tpconnections.com).